UK Govt Mulls Oil Tax Tweaks, Rejects Radical Proposals

LONDON Dec 06, 2007 (Dow Jones Newswires)

The U.K. government proposed in a report Thursday a number of tweaks to the tax regime for oil and gas fields in the U.K. North Sea that it said should prolong its productive life, but rejected more radical reforms some companies have demanded.

Oil and Gas U.K., the trade association that represents the offshore industry, welcomed the proposals, but urged the government to further reduce the overall tax burden on the declining basin.

Some U.K. North Sea operators have previously called radical reforms such as the scrapping of the Petroleum Revenue Tax or separate tax regimes for oil and gas, but the Treasury rejected these ideas as inappropriate.

The PRT is levied at 50% of cash flow after capital expenditures and operating costs on oil produced in the North Sea above a specific allowance for each field. It applies to fields that received development consent before March 1993.

The Treasury ruled out abolition of the tax, saying it would create "a large number of winners and losers." It was also not attracted to several industry proposals on eliminating the tax, including allowing companies to buy out their PRT liabilities or switch them off on a field by field basis when decommissioning tax relief exceed the amount of PRT paid.

Instead, the Treasury proposed an extension to the period over which companies can carry-back losses to claim tax relief on the decommissioning of oil and gas infrastructure.

Current legislation allows companies to carry back decommissioning costs for three years, but the industry has argued this isn't enough time to give it full tax relief. The new proposals will extend the period over which companies can reduce their PRT liability due to decommissioning costs to seven years.

The government also proposed reforms that would allow companies that have sold a field, but subsequently became liable to decommissioning costs because the buyer went bankrupt, to claim PRT relief on these costs.

These reforms should ease the burden of decommissioning offshore platforms and associated infrastructure at the end of their lives and increase the amount of oil and gas recovered from the U.K. continental shelf by allowing companies to operate fields for longer, the Treasury said.

The Treasury said it supports incentives to help companies tap resources considered uneconomic in the current fiscal regime, but added that further discussion is needed to come up with workable proposals.

The report acknowledged that gas and oil prices have diverged recently, but it said there is no evidence that this will continue in the long term and separate tax regimes would be too complex.

Malcolm Webb, Oil & Gas U.K.'s chief executive said: "The changes proposed so far should help to extend the life of many fields and facilitate the transfer of assets. However, we believe the future of the North Sea can only be properly secured by reducing the overall tax burden to ensure investment can be sustained."

U.K. oil and gas producers pay 30% corporate tax plus a supplementary charge of 20%. PRT is deductible from corporate tax.

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